Last month, Royal Dutch Shell released its Second LNG Outlook, foreseeing a world shortage of liquefied natural gas (LNG) in the next decade. While LNG demand has increased, multiple factors contribute to this prediction. The Outlook looks at three themes supporting this prediction:
1. External Environment is creating opportunities for gas and LNG
Numerous policy actions locally, nationally, and globally, have provided strong opportunities for this energy resource. Globally, the G20 endorses natural gas in energy transition. The International Energy Administration (IEA) indicates leveling of global CO2 emissions due to coal displacement by natural gas. This is occurring locally and regionally, such as Beijing meeting its ambitious 2017 air quality targets, due to switching from coal to natural gas, and EU policies supporting coal phase out.Natural gas has been shown and will continue to support renewable power generation and provides cleaner non-power energy supply. In California, natural gas complements solar power for even energy needs, as it does with hydropower in Brazil.
In the next two decades, natural gas demand is estimated to grow at an average of 2% per year, double the rate of total global energy demand. LNG demand is expected to increase at an average of 4% per year. The outlook indicates natural gas is expected to make up over 40% of energy demand growth over the next two decades, some to generate power, but the bulk of future demand growth – led by rapidly growing economies in Asia – will come from sectors that are more difficult to electrify, such as the production of steel and cement. In regions such as Asia and the Middle East, LNG will be important due to limited cross-border pipelines. Floating storage and regasification units (FSRUs) will provide quick, flexible and economically competitive options for countries interested in importing LNG. These vessels can be docked in a port to regasify LNG and feed gas into a transmission or distribution network.
2. Strong LNG fundamentals exceeded expectations in 2017
In 2017, 19 countries were providing LNG, providing security for countries importing the product. This was an increase from 12 countries in 2000. The importing countries were supplied with 293 million tons of LNG, enough to power 575 million homes.
The global LNG market size grew by 29 million tons last year, with 45% of planned capacity expansion completed. In the US, there are 5 LNG export terminals anticipated to be online by the end of 2019. Cheniere was the first US exporter of LNG sources from shale gas in 2016, and has just announced a long term LNG supply agreement with a customer based in China. The company may consider expanding an under-construction LNG export platform in Corpus Christi with other Chinese deals. Dominion Energy exported its first load ofLNG March 1 from its Cove Point facility.
Asian countries led the way with LNG imports, with China overtaking South Korea as the second largest LNG importer, behind Japan as the largest LNG importer.
A 17% increase in spot cargoes in 2017 has played a role in the LNG outlook. The traditional method of long-term contracts that allowed sellers to underwrite investments in large processing facilities has been offset with buyers preferring more flexible contracts that allow them to buy fewer supplies over shorter time frames.
3. Supply investment is required to meet long-term demand growth
As mentioned above, suppliers prefer long-term contracts for investment purposes. The preference for spot cargoes and short-term contracts by buyers has slowed the LNG projects, which take more than 4 years to start production. Thus, projects needed to handle the new supply won’t be online until well into the next decade.
Increasing levels of deregulation and competition in downstream gas and power markets have inhibited buyers to purchase LNG volumes on a traditional long-term, fixed volume basis. Shorter, smaller contracts can be challenging for new LNG buyers in terms of establishing a good credit rating. This mismatch between buyers and sellers needs to be worked out to enable investment decisions to move forward to meet the LNG needs globally.
The Shell Outlook can be viewed on their website.